Centene Corporation — Form 10-Q Summary
Business and period: Centene is a government-sponsored health-plan and specialty-services provider, operating Medicaid Managed Care and Specialty Services segments. This unaudited report covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Premium and service revenue | $1,081.5 million | $987.3 million | $3,154.3 million | $2,827.5 million |
| Total revenue, including premium tax | $1,121.9 million | $1,038.2 million | $3,267.4 million | $3,010.1 million |
| Earnings from operations | $40.2 million | $38.0 million | $111.6 million | $100.4 million |
| Net earnings attributable to Centene | $22.7 million | $21.3 million | $69.4 million | $60.0 million |
| Diluted earnings per share | $0.44 | $0.48 | $1.38 | $1.36 |
| Health Benefits Ratio | 84.2% | 83.7% | 84.0% | 83.4% |
| General and administrative expense ratio | 12.2% | 13.2% | 12.7% | 13.5% |
- Cash flow: GAAP operating activities used $25.7 million in the first nine months of 2010, versus $177.0 million provided in 2009. Management attributed the 2010 use primarily to premium-payment timing: receivables rose $68.1 million and unearned revenue fell $38.7 million. Investing activities used $36.0 million and financing activities provided $55.6 million. Cash and cash equivalents were $397.7 million at September 30.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $428.3 million; long-term investments were $479.2 million and restricted deposits $20.6 million. Working capital was $14.9 million, compared with negative $99.8 million at year-end 2009. Total debt was $264.2 million, down from $307.7 million; the debt-to-capital ratio was 24.7%, versus 33.2%. No borrowings were outstanding on the $300 million revolver; after $47.3 million of letters of credit, $252.7 million remained available. The company reported covenant compliance.
- Capital: Nine-month capital expenditures were $92.0 million, including $69.2 million for the headquarters development. The development’s construction loan had $73.4 million outstanding. The company raised $104.5 million net from a 5.75 million-share offering and used part of the proceeds to repay the revolver, fund acquisitions and capital expenditures.
Changes versus prior period
- Q3 premium and service revenue increased 9.5%, operating earnings rose 5.9%, and net earnings attributable to Centene rose 6.6%; diluted EPS declined 8.3% to $0.44. Management cited share-count growth and unusual investment items among the results’ influences.
- For the first nine months, premium and service revenue rose 11.6%, operating earnings 11.2%, attributable net earnings 15.8%, and diluted EPS 1.5%. Nine-month results included the gain on the UHP asset sale.
- At-risk membership reached 1,470,800, up 6.1% year over year. Growth included Massachusetts and South Carolina; Florida at-risk membership also increased. Specialty Services operating earnings declined 21.1% in Q3 and 3.0% year to date, while Medicaid Managed Care operating earnings increased 10.7% and 17.2%, respectively.
- Medical costs increased faster than premium and service revenue in Q3 and year to date. The HBR rose 0.5 percentage points in Q3 and 0.6 points year to date, with management citing Florida and higher Specialty Services costs. G&A expense ratios improved, which management attributed to expense leverage and lower variable compensation.
Outlook, commentary and notable items
- Management estimated the 2010 composite premium-rate increase at 1.5%–2.5%; some rates remained subject to CMS approval. Pharmacy-benefit carve-outs in two states reduced revenue by approximately $48 million in Q3 and $131 million in the first nine months.
- Management expected operating cash flow to improve in Q4, while noting state payment schedules can shift reported cash flows. It stated available resources should cover general operations, the planned Citrus Health Care acquisition and capital expenditures for at least 12 months from filing.
- Growth opportunities cited include expected Mississippi operations in Q1 2011, expanded Arizona services, Texas and Indiana contracts subject to finalization, and an Illinois program expected to begin in the first half of 2011. The Citrus Health Care transaction was expected to close near year-end. These are forward-looking expectations, not completed results.
- Countervailing developments include the loss of the Southeast Wisconsin BadgerCare Plus contract effective November 1, 2010, and a Texas CHIP vendor addition that reduced membership in the affected product by about 48,000 year over year.
- Unusual items: the Q3 results included a $5.5 million impairment of a software-company investment, partly offset by realized investment gains and Reserve Primary Fund distributions. The company said it anticipated providing further funding to complete the software product in exchange for majority control. The March 2010 UHP asset sale generated an $8.2 million pre-tax gain; UHP was reported as discontinued operations. Georgia tax-law changes led to a $1.7 million deferred-tax-asset write-off, approximately $0.03 per share.
- Key risks include medical-cost estimation and utilization, state funding and premium rates, contract renewals and regulatory approvals, health-care reform implementation, provider relationships, and investment-market and interest-rate exposure. A hypothetical immediate 1% rise in market rates was estimated to reduce fixed-income investment fair value by about $12.5 million. Statutory capital and surplus was approximately $525 million against $281 million of minimum requirements; estimated RBC exceeded 350% of the Authorized Control Level.
Investor verification priorities
- Check subsequent disclosures on CMS approval and realization of the estimated 2010 premium-rate increases, and the resulting impact on margins.
- Monitor medical-cost development, particularly Florida and Specialty Services, and compare claims-liability estimates with subsequent payments and adjustments.
- Assess whether operating cash flow rebounds as management expected, considering the premium-receipt timing effects and future state payment schedules.
- Verify completion, financing and returns of the headquarters project and planned acquisitions, including Citrus Health Care and the proposed software-company funding.
- Track membership and earnings effects from the Wisconsin contract loss, Texas CHIP competition, and the expected new-state and expanded-contract launches.
- Review regulatory approvals for UHP statutory capital transfers and the status of state and federal health-care reform implementation.